House prices are still far too high – but things are improving slowly

Enjoy the calm while it lasts

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House prices across the UK rose by an average of 0.8% in November.
That was, notes Nationwide chief economist Robert Gardner, the twelfth month in a row that house price growth has been below 1%.
That said, it was also the strongest growth seen since April.
Is this – whisper it – a sign that Britain’s most dangerous asset class is on the verge of a comeback?
Why housing bubbles are so damaging
Spoiler alert – the answer to the question above, in my view, is “no”. And we should be glad.
Britain’s residential property market has lain at the heart of the majority of the most damaging (in terms of widespread pain) economic bubbles that we’ve suffered.
There’s a simple reason for that. Houses are widely owned, and we tend to own them with debt. When you own an asset with debt, then when the price goes up, you make more money than if you owned it outright. But you suffer the same amplifying effect on the downside.
The problem is that, because most of us want to own the house in which we live, we’ll tend to leverage ourselves up to the gills to get a home (ie, we take out the biggest mortgage we can). When the housing market becomes frenzied, that means it’s very easy for things to get out of hand.

Eventually you end up with new buyers taking out 125% mortgages to buy houses at hugely elevated prices. This means that not only are lots of individuals exposed to the housing market, but the banking system is too.
When something bad then happens to the economy – a recession puts lots of people out of work, say – then not only do people lose their homes, but the debt secured against the homes turns bad too, and the banks go from being “please please please borrow money from us” to “computer says no” overnight. That just feeds into the recessionary spiral as loans are called in left, right and centre.
There’s no reason to expect boom – or bust
So the good news is that it’s hard to see any reason for another rampant period of house price growth from here.
Hansen Lu at economic consultancy Capital Economics reckons that “even if the economic and political uncertainty eases next year, house price growth will only pick up a little in 2020 and 2021.”
That’s mainly because house price affordability is still so poor. The house-price-to-earnings ratio peaked at 7.3 times in the first quarter of 2017. Since then, wage growth has started to outstrip house price growth. So even though house prices have still ticked higher in nominal terms, affordability has improved.
However, two and a half years later, it’s still sitting at a whopping great 6.8 times. So even if you don’t expect it to get back towards the longer-term average of closer to 4.5 (which would imply a very big fall from here, or a massive surge in wage inflation), then it’s still hard to argue with the statement that house prices still look expensive.
As I’ve stated here many times before, I don’t expect to see a crash imminently. For a crash to happen, you really have to have forced sellers. To get forced sellers, interest rates need to rocket (so that people can’t afford their mortgage payments) or unemployment needs to rocket (so that people aren’t earning the money to pay their mortgage).
I don’t see either of those things happening in the near future, which is good – regardless of how keen you are to get on the property ladder, you’d have to be something of a sociopath to welcome the misery caused by mass unemployment and rampant repossessions.
Equally though, as Lu says, it’s hard to see prices rallying much from here. If we do get political clarity and a bit of economic stability following the election, then you’d have to accept that interest rates are also unlikely to go down (and even if they could, there’s not much room left, assuming that we all agree negative rates are a stupid idea).
So other than a price war between the banks (and to be fair, there are signs of banks competing to push down mortgage rates right now), there’s not much that can happen to make homes look massively more attractive.
And of course, if we don’t get any clarity at the next election, then it’s hard to see anyone being in the mood to invest heavily in property. The Conservative government has already proven that it’s no friend to landlords. But Labour has mooted the idea of a “right to buy” for private tenants, while the Lib Dems are looking at imposing rent caps and longer-term tenancies.
On that point, it’s also worth noting that ex-chancellor George Osborne’s restrictions on buy-to-let mortgage tax relief are still not quite done yet. The final phase kicks in next tax year – from April 2020, landlords will lose the last vestiges of the relief.
On the one hand, most landlords should have a good idea of how hostile the sector is by now. On the other, there are always a few stragglers who are never going to get the message until they get an unexpected tax bill.
In short, there’s no reason right now to expect another imminent boom or bust in the UK housing market. This is an uncharacteristically calm period for Britain’s most dangerous asset class. If we’re lucky, the steady drift towards greater affordability might even continue.
We should probably try to enjoy it while it lasts.

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